Benefit-Cost Analysis of Ethanol
Economic Viability
Impact of Government Regulation
The economic viability of corn based ethanol production can be based largely on a cost-benefit analysis of the production process. Based on current production technologies the costs of producing corn based ethanol far outweigh how much it is worth in the market, however this is offset by the close to $3 billion per year in government subsidies that are applied to the industry. Without the support from state and local governments it is likely that the production of corn based ethanol would cease completely.
On a firm level the production of corn based ethanol is also seen as economically inefficient. A study by the University of Nebraska found that even when tax credits are subtracted from the costs for a 100- MGY plant profits are only predicted to exists until 2012 at which point costs will begin to outweigh the benefits. This will push the plant past the break even point and make the continued production of ethanol economically unviable. This is due in part to forecasts that corn prices will continue to rise while ethanol prices will fall. It is also important to note that the market price of ethanol is largely a result of the Renewable Energy Standard which creates a demand for ethanol which would otherwise not be present. Without this government regulation the demand, and therefore the price for ethanol would likely drop significantly, further reducing profit margins
Effects on Pump Price
The cost of ethanol production has a large impact on the cost incurred by consumers at the gas pump. In 2008 ethanol prices surpassed those of gasoline and blending resulted in higher prices for gas. In early 2009 corn prices reached record levels at $4.10 per bushel and when combined with ethanol prices of $1.66 per gallon (in comparison to gasoline which was priced at $1.68) blending resulted in higher prices at the pump. Although the price paid by consumers is largely dependent upon the price of ethanol verses gasoline, given current production technologies and the market prices of corn, it is unlikely that blending will result in lower costs to consumers in the near future.
Impacts on Other Markets
In 2008 it was predicted that approximately 3.7 billion bushels, or 1/3 of the corn produced in the United States will go towards the production of corn based ethanol. It is predicted, based on current consumption patterns that by 2018 the production of corn based ethanol will consume approximately 44% of all US corn. However despite the large portion of corn going towards the production of ethanol, ethanol only represents approximately 2%-3% of the total gasoline utilized by US vehicles. The increase in demand for corn has resulted in a shift in agriculture, and displaced other important crops such as soybeans; it argued that these shifts will result in significant negative consequences for many rural/agriculture based communities.
The increase in demand for corn to produce ethanol has also led to rising prices for corn both for human consumption and as a input for other agricultural. The causes of this are two-fold. First, as the demand for corn rises while the supply remains constant (although the supply of corn, like other crops, fluctuates from year to year depending upon the conditions during the growing season) the prices are pushed upward. Second, many farmers have seen the subsidies for yellow corn (the type used in the production of ethanol) to be very appealing and have switched from growing white corn to growing yellow corn. This decrease in supply has caused prices for products containing white corn (such as tortillas) to rise. The cost of other agriculture products have also been affected by the increased demand for corn to produce ethanol. For example, it has been estimated that ethanol production is resulting in a total of increase of $1 billion in the meat production industry, since corn is used to feed livestock. This results in consumers not only experiencing higher prices for beef, but also an increase in prices of related goods, such as dairy products. In a time when food security is a concern in many parts of the world, the production of corn based ethanol is reducing the supply of corn and driving up food prices, significantly decreasing the chances of global food security.
